May 21, 2009 / 2:59 PM / 10 years ago

CANADA STOCKS-Oil price fall sparks TSX dive

* TSX down 2.52 percent at 9,974.64,

* Energy sector, down 3.8 pct, leads TSX lower

* Oil pulls back from 6-month high (Adds details, quotes)

By Jennifer Kwan

TORONTO, May 21 (Reuters) - Toronto’s main stock market index fell sharply on Thursday morning after rallying for two days as declining oil prices pulled down energy shares.

A drop in the oil price to below $61 a barrel from the six-month peak it hit in the previous session was the main culprit dragging the index lower. [ID:nSIN101873] The energy sector fell 3.8 percent with EnCana Corp (ECA.TO) down 4.5 percent to C$59.47. Canadian Natural Resources (CNQ.TO) fell 6 percent to C$59.79.

The pullback is to be expected following an equities rally over the past two months or so, said Gareth Watson, Canadian equity advisor, Portfolio Advisory Group, ScotiaMcLeod.

“It’s a market that is ahead of itself. Oil prices are ahead of itself, and expectations of a recovery that are too optimistic,” Watson said.

“Generally, it’s a market that has been pushed up by momentum than fundamentals in the past two months.”

At 10:19 a.m. (1419 GMT), the S&P/TSX composite index .GSPTSE was down 257.80 points, or 2.52 percent, at 9,974.64, with all 10 of its main groups lower.

As well as oil prices, base metal prices were largely weaker on belief the road to economic recovery was likely to be long, arduous and fraught with uncertainty. [nLL341053]

The TSX’s materials group dropped 2.9 percent, with Potash Corp of Saskatchewan Inc POT.TO down 3.9 percent at C$125.22, and First Quantum Minerals (FM.TO) falling 6.3 percent to C$47.02.

Financials fell 2.1 percent as a fresh batch of economic news dimmed expectations that the worst of the economic recovery may be over. Manulife Financial (MFC.TO) dropped 3.5 percent to C$21.63.

“The economic data that is coming is still not necessarily showing this remarkable turnaround that some people are pricing into the market,” Watson said.

Toronto followed world stocks lower as signs of further labor market weakness fueled doubts about a quick economic recovery, and Standard & Poor’s revised its UK ratings outlook lower. [MKTS/GLOB]

“We could also be a victim of fund flows, that there is a lot of cash out there and sometimes investors feel they need to put it to work, especially when the markets are going up,” Watson said.

$1=$1.14 Canadian Reporting by Jennifer Kwan; editing by Peter Galloway

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